Winners and losers in push to improve Employee Share Plans

It is fair to say that at this stage of the game, there are more losers than winners based on the Abbott Government’s long-awaited Industry Innovation and Competitiveness Agenda.

Sure there are some clear winners but for some key players in the economy, there is no relief currently in sight from long standing issues affecting share plans.

The winnersThe clear winners are private “start-up” companies defined as unlisted, incorporated for less than 10 years and with an aggregate turnover of less than $50 million. Broadly, it is proposed that employees of start-up companies can normally defer tax when options are provided to when the shares are sold, and then be subject to capital gains tax (and if they get the timing right) with a 50 per cent discount rather than income tax.

Employees of eligible start-up companies can be offered shares at a discount of up to 15 per cent and not pay tax at that point. Again capital gains tax will apply when the shares are sold. Under the proposed changes effective from 1 July 2015, employees generally won’t have to pay tax on options until they are converted to shares. This is very good news for employees of unlisted companies as it gives them control on when to crystallise a tax liability. Under current rules they broadly pay tax when any restrictions (risk of forfeiture) relating to the options are lifted.

The losersThe clear losers are private companies that do not meet the definition of a “start-up” company and a small-cap listed company. This covers a significant number of employees for who the proposed changes mean little if anything.

Employees who leave their employer will continue to trigger a taxing event at that point in relation to share plans. For employees of private companies this can be a real problem when there is no liquid market for their shares to raise cash to pay a tax liability. Employees issued with shares rather than options will not get the same advantageous tax deferral.

What hasn’t changed?The tax rules are still going to be difficult and complex and there is going to be another transitional period to navigate. In addition, there are restrictive corporation laws requiring a prospectus to be issued for anything other than small-scale offerings. The tax rules in place prior to 2009 – when the Labour Government changed the rules – still had issues that were an impediment to wider share scheme participation. There is no indication at this stage whether these issues will also be addressed.

There will still be a large number of companies that will remain sceptical about the practical benefits of putting a share plan in place. However, there are practical solutions that have been developed since the rules were changed in 2009.

ConclusionWe welcome the direction of the proposals however; there are a number of unresolved issues in relation to the government’s announcement. We plan to consult with the treasury in relation to our questions.

Andy joined Moore Stephens in 2013 as a Director of Taxation bringing more than 25 years’ experience in tax consulting to the firm.Andy delivers solutions-focused strategic taxation advice to large, complex multi-national and privately owned organisations, as well as high net worth individuals and superannuation funds.